first time investor

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Wealth & Personal Finance

Here’s a situation that myself and peers are in right now, given that we graduated 1-3 years ago and have some money to spare. We want to save and invest… so, the big question is, how do you start?

Disclaimer: I am not responsible for your loss or headaches (but you can share gains with me, haha :D). Seek professional financial advice if you really need it.

Being an investor is all about the risk you want to take. How fearful of you of losing money? Have you ever went to a casino and sat down at a card table game and lost? Did you feel bad or did you think you could try again to win?

The simplest things you can do to invest your money is to:

  1. Open a savings or CD account
  2. Put money into your company’s retirement account
  3. Open a separate retirement account
  4. Buy equities (or stocks)
  5. Buy life insurance
  6. Start an education savings fund

Keep in mind that there are many many investments outside of this list that I do not know (since it’s outside of my risk profile).

1. Set aside money to a savings account (if you can have your paycheck auto direct deposit, that would be best) or a CD.
a. A savings account is the safest, but slowest, form of investment. Most banks give, at most, 1% yearly interest. With the current market, inflation is more than 1%, meaning your money is LOSING VALUE, but… it’s better than having your money sit in a checking account and LOSE MORE value. Savings accounts usually have a limited number of times you can withdraw from it, so be wary of that.
b. A CD (certificate of deposit) is an agreement to set aside a certain $ amount for a certain time period to gain a certain % back (ex: put $5,000 for 2 years and earn 1.25% interest). The % return is generally a bit more than the savings interest rate. The downside of this is that your money is locked up for that time period. This is good if you want to have a safe investment and have extra cash, since you can’t tap into it for a while.

2. Put money into your company’s retirement program, if available. This is usually a 401k (for-profit companies) or 403b (non-profit companies). If they offer matching contributions, max out to that amount if you have those funds available. Usually companies have a vesting period, meaning you need to be part of the company for X years before that money is actually YOURS to keep. You may also have options for a traditional 401k or Roth 401k plan. Select the one that suits you best: traditional if you think that taxes are going to be LESS when you retire since you will contribute pretax dollars, or Roth if you think that your taxes are lower NOW, so you don’t want to be taxed when you collect the money when you retire.

3. Open an Roth IRA (individual retirement account). This is good for you if your company does not provide a retirement program, since it’s best to contribute when young and let earnings accumulate. This is also good to have as an additional retirement account. At the rate social security is going, you will not have enough just relying on that when you’re 67. Your contributions will be using your after-tax dollars and if your income is < ~$55k, you can claim a tax credit for your contribution. I would recommend a Vanguard or Etrade Roth IRA account; complete their risk profile questionnaire and select certain stocks or pick the targeted-age fund. With certain financial institutions, after X years, you can borrow money from this account to purchase your first home.

4. Purchase equities (stocks).

Let me start off by saying that the markets are pretty bad right now because everyone is panicking over China. Markets are controlled by people’s emotions, so if you think the world is going crazy, the market will follow. So stay positive and ride things out, cause things always bounce back. Good time to buy equities cause things are cheaper, but do research!

Equity is tricky since it really depends on your risk profile. If you are like me, and risk-adverse, I would recommend investing in (1) “safe” stocks of companies that you think will last forever. My first purchase was Heinz cause I believed ketchup would always be successful. BTW, it went private so my shares auto-sold for a gain. (2) ETFs (exchange traded funds) are great because they are a bunch of stocks put together, that way, it’s usually not as volatile since the fund managers are watching performance and adjusting as needed. (3) High dividend stocks are great because you are actually making money every few months. Some stocks give dividends every month, quarter, or other frequency. You can go on Yahoo Finance or Google to find which equities have the highest dividends and see if those are a fit for you.

If you are willing to take more risk, which usually leads to greater gains, then you would need to follow the market and news more. You can research certain industries and see what is going on. Ex: in tech, there are a bunch of startups going for IPO (initial public offering), so you can follow the news and see if you want to invest in this. Ex: in medicine, the stock of the company that created a vaccine for Ebola shot up after the announcements were made. Ex: in fitness, SoulCycle just went for IPO, I didn’t really follow this to see if it went well…

 

5. Buy life insurance. The younger and healthier you are, the cheaper your yearly payment (premium) will be. Life insurance is great because you protect your family/beneficiaries by providing money to them after your death for any expenses, such as funeral, debt, or mortgages under your name. While you ARE alive, you can use this account as a line of credit and borrow from yourself for purchasing a home and other possibilities as offered by the financial institution. If you ever become disabled, you can collect money from this account as well.

6. Open an education savings account if you think you may want to go back to school. The return on the money is tax free if used related to education (tuition, room and board, supplies, etc). If you decide to NOT use for education, then regular tax rates apply to gains (including any additional fees as noted by the financial institution). You can claim a tax credit for contributions. You can also set this account up and have the beneficiary be someone else (sister, nephew, child) and change it at any time.

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